Banks face a raft of new claims over interest rate swap mis-selling after the
Financial Ombudsman Service overturned two of its earlier verdicts and
ordered lenders to pay compensation to victims.

Banks could face thousands of new claims from small businesses over mis-sold interest rate swaps after a reversal by the Financial Ombudsman Service of two decisions not to award compensation to victims.

Banks, including all of Britain’s major high street lenders, could be hit with a flurry of claims that could potentially costs them millions after the surprise FOS judgements.

In findings published this week, two unnamed banks were ordered to pay hundreds of thousands of pounds in compensation to two customers mis-sold interest rate swaps.

Identified only as 'Bank E’ and 'Bank S’, the lenders, understood to be two of the country’s leading high street banks, were accused of putting their own profits ahead of the customers’ interests in selling them interest rate swaps that ended up crippling the businesses.

In a judgement involving an unnamed hotelier identified as 'Family W’ ombudsman official Tony Boorman said 'Bank E’ had sold swap “primarily for the bank’s commercial convenience and with little or no attention to the needs of its client”.

Mr Boorman’s findings in both cases overturn original verdicts in the banks’ favour and raise the prospect of a flood of new cases from the thousands of businesses sold interest rate swaps.

In the case of 'Family W’ against 'Bank E’, the new FOS verdict recommends the lender pay compensation to the hotelier that could cost it more than £500,000.

Eleven banks, including Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland, have signed up to an Financial Services Authority redress scheme for swap mis-selling, however small businesses have criticised the process saying it gives too much power to the lenders.

Giving evidence to the Treasury Select Committee yesterday, Sir Donald Cruickshank, who has carried out several reviews into the banking industry for previous governments, said the recent Libor-rigging scandal represented only the “tip of the iceberg” of the problems facing lenders.

Guto Bebb, a Conservative MP and chairman of the recently launched all-party parliamentary group on swap mis-selling, said the FOS judgement showed the scandal could be “bigger than PPI [payment protection insurance]”, which has already cost the industry more than £10bn.

“The finding that banks are responsible for the advice they give is very significant and represents a complete change from the 'buyer beware’ approach previously taken,” said Mr Bebb.

Barclays has made the largest provision against swap mis-selling claims, putting aside £450m to pay compensation, while HSBC and RBS have each made smaller provisions. Lloyds has said it does not expect the costs of the scandal to be “material”.

Toby Perkins, shadow small business minister, said the FOS judgement showed the need for the authorities to tackle the mis-selling scandal quickly.

“These are a couple of business customers of the many, many hundreds we are coming across that were sold products by banks they thought they could trust that damaged their businesses,” he said.

The FSA currently estimates more than 40,000 swaps have been sold to SMEs and Bully Banks, an organisation representing victims, has more than 800 members.

Fraser Whitehead, a partner at Russell Jones & Walker, which is representing several swap victims, said the FOS judgement “definitely represents a significant change in the attitude” of the ombudsman.

“I would recommend that any businesses that have had a case rejected by the FOS resubmit their claim,” said Mr Whitehead.

The swaps mis-selling comes at a time of great uncertainty for established banking groups as the authorities prepare to bring in a new regulatory structure.

Andrew Bailey, the chief executive designate of the Prudential Regulation Authority, which will take over the FSA’s responsibility for supervising the banking industry, said yesterday that new banks could get more leeway on capital rules in an effort to improve competition.

Mr Bailey’s comments came as Hector Sants, the former chief executive of the FSA, said he wished “bankers had been more honest” as he complained that many senior industry executives had been “self-delusional” about the risks their firms were taking.